CCA published a solid set of 1H15 results, which were slightly ahead of market expectations (albeit expectations were low following recent events) with EBIT flat at $316.9m (vs $316.7m 1H14). While trading revenue was up 4.9% to $2,449.7m, adjusted EBITDA (before significant items) was only marginally up (1.3%) to $453.9m as margins dropped from 19% to 18.3%. By division:
- Australia (55% of trading revenue): EBIT declined 6.1% as significant investments were made in pricing, brand building, innovation and route to market improvements. Revenue was marginally up (0.5%) as increased volume was offset by a decrease in revenue per unit case. Management expects most cost-savings to be delivered in the second half and believes the business to be on track to deliver its 3-year cost savings target of $100m;
- NZ & Fiji (10% of trading revenue): EBIT increased 9.9% in AUD driven by strong performances across the Carbonated Soft Drinks (CSDs) and take-home water range;
- Indonesia & PNG (20% of trading revenues): EBIT was strongly up by 46.4% to $22.4m with both the Indonesian and PNG businesses delivering solid volume growth as well as benefiting from the appreciation of the Kina in PNG;
- Alcohol, Food & Services (8% of trading revenue): EBIT was up 30.4% to $14.6m driven by the strong performance in the Spirit and Ready To Drink (RTD) segment;
- Corporate, Food & Services (8% of trading revenue): EBIT was up 1.5% to $13.4m, as savings in corporate costs were offset by reduced services earnings;
Operating cash flow was down significantly ($161.2m vs $256.6m in 1H 2014) as a result of strong outflows from working capital. The outflow is due to a seasonal uplift in working capital as Ramadan (which effect Indonesia) was moved forward, a increase in stock in both the Australian beverages and SPC (the food business of CCA) business segments to transition site closures and new line commissioning and an increase in general working capital to support growth in Indonesia and PNG. Management believes these increases to be above all timing related but in our opinion this is not a creditr positive for the compnay and we will watch for a cash flow reversal in the full year results. Capital expenditure was down ~30% to $91.6m as the company comes to the end of its 5-year Project Zero efficiency and vertical integration program across Australia and New-Zealand. Working capital outflows were also the driver of a drop in free cash flow by 54.4% to $71.5m. Net debt actually decreased over the period from $1.85bn at the end of FY14 to $1.4bn thanks to the receipt of USD500m from majority shareholder (“The Coca-Cola Company”) in return for a 29.4% interest in PT Coca-Cola Bottling Indonesia. Credit metrics were mixed with interest cover increasing to 6.2x (from 5.2x in 1H14), debt to EBITDA was flat at 2.8x while fund from operations to debt weakened to ~ 25%. From a liquidity perspective the high level of cash has enabled CCA to pre-fund all future debt maturities to February 2017. Outlook CCA is targeting to return to mid single-digit growth in EPS in next few years with no further declines expected after 2014, management seems to be optimistic to see the first benefits of its transformation plan in the second half of the year. Capital investment is expected to be around $300m in 2015 but expects it to be reduced in the next few years. Management believes to be well-placed to have a dividend payment ratio of over 80% in the next 3 years. Next Event: FY15 results expect to be published in February 2016.